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Guide to Social Cost Benefit Analysis

The Effectiveness of Alcohol Pricing Policies

Summary

$m changes in first year[28]

Quantified Benefits Notes Min. price $1.00 Min. price $1.20 Excise 
↑ 82%
Excise
↑ 133%
Increase in excise tax revenue due to rate increase (a)     $717 $1,066
Partially offset by reduction in excise tax revenue due to quantity decrease (b)     -$84 -$137
Reduced alcohol-related health costs (c) $11 $23 $83 $129
Reduced alcohol-related crime costs (d) $45 $94 $332 $516
Reduced alcohol-related workplace productivity costs (e) $9 $19 $60 $95
Total   $65 $136 $1,108 $1,669
Quantified Costs          
Loss of consumer surplus (f) $90 $180 $763 $1,188
Partially offset by transfer of consumer surplus to industry (g) -$86 -$167    
Loss of industry asset value (h) $1 $2 $6 $10
Reduced excise tax revenue (i) $18 $35    
Total   $23 $50 $769 $1,198
Results          
Net benefits   $42 $86 $339 $471
Benefit cost ratio   2.8 2.7 1.4 1.4
Unquantified Benefits          
Reduction in harm accruing to people other than the drinker (j)        
Impact on alcohol on volunteering (k)        
Unquantified Benefits          
Reduction in harm accruing to people other than the drinker (j)        
Impact on alcohol on volunteering (k)        
Unquantified Costs          
           
           

306.This CBA was undertaken by the Ministry of Justice and was published in early 2014. It analysed the impact and effectiveness of a regulated minimum price per standard drink of alcohol[29] in reducing harmful alcohol consumption.

307. The study attempted to ascertain the most effective minimum price from the point of view of maximising social welfare (ie, social and economic benefits minus social and economic costs) and also investigated how a minimum price compared with an increase in the excise tax.

308.The study can be found here: http://www.justice.govt.nz/publications/global-publications/e/the-effectiveness-of-alcohol-pricing-policies.

Notes

309.Benefits estimates:

  1. Transfer to government: An increase in excise tax results in increased revenue for government, as well as increased revenue from increased sales of beverages to which consumers switch as a result of the relative price changes (eg, high priced beer, wine and spirits). The loss of revenue as a result of the reduced quantity consumed is accounted for separately in line 6.
  2. Reduction in excise tax: Because demand for alcohol is not completely inelastic, both an increase in price and an increase in excise duty result in a reduction in quantities consumed and therefore government revenue.
  3. Health effects: changes in hospitalisation, specialist treatment, Accident Compensation Corporation (ACC) and drug treatment costs to Government were counted.

    The threshold for harms was assumed to start from 6 standard drinks per day (chronic harms) or per drinking occasion (acute harms).

    Alcohol-related health harms were modelled in some detail to take into account the probabilities of contracting different kinds of health risks depending on age, sex and type of drinker. Data was sourced partially from the Sheffield study and partly from Dept of Statistics and Ministry of Health sources.
  1. Reduction in crime costs: This requires an estimate of
    • the proportion of each crime type that is attributable to alcohol consumption: This data is available from NZ Police and Ministry of Transport.
    • the extent to which crime is reduced as a result of less alcohol consumption.
    • the cost of crime: The costs to victims were based on the 2006 New Zealand Crime and Safety Survey and the 2007 Business Crime pilot study. From each of these surveys, the average costs to the victims for each crime type were derived and updated to 2010/11 estimates using the Consumer Price Index (CPI). For the cost to government, only the Department of Corrections provides data on both average and marginal costs of crime. This relationship between average and marginal costs was applied to the average costs of crime for the police, courts, DHBs, ACC and New Zealand Fire Service.
  2. Work-place productivity gains: The study assumed that the productivity impact on the individual is reflected in the consumer surplus and the slope of the demand curve. Only the impact of productivity gains on the rest of society should therefore be counted. Alcohol consumption is thought to cause three kinds of costs on the rest of society (aside from health and crime costs already accounted for):
    • frictional costs (the costs saved by businesses in not having to hire workers to replace those who drop out as a result of alcoholism),
    • the additional PAYE tax as a result of working or working for a higher wage,
    • the savings in welfare payments (unemployment and sickness benefits).

310.Cost estimates:

  1. Consumers’ surplus is a measure of consumers’ benefit and is the difference between what consumers are willing to pay for an alcohol product and the market price of the product. The willingness to pay for an additional unit declines as the purchased quantity increases. This is illustrated by the demand line in figure 4.
  2. Figure 4: Impact of a price increase whether due to minimum price or increase in excise duty

    Source: The study document

    As the figure illustrates, an increase in price leads to a decrease in consumers' surplus. Some of this consumers' surplus is transferred to the industry (in the case of a minimum price) or government (in the case of an excise tax increase). This transfer is taken account of in some of the other lines in the cost benefit table.

    1. The size of the loss of consumer surplus can be determined geometrically if the price elasticity of demand is known and the demand ‘curve’ is assumed to be a straight line. The study surveyed international evidence of price elasticities and researched New Zealand elasticities and consumption levels. The elasticities came out much higher than international estimates. There were methodological issues[30], and as a result they were deemed to be unreliable. Estimates produced by a study carried out by the University of Sheffield were typical of other international results and seemed more credible, and were used for the purposes of this CBA.
    2. Complications that were considered include the likelihood that different classes of consumers (binge drinkers, heavy drinkers, light drinkers, males and females, different age groups, drinkers of cheap vs expensive beer, wine and spirits, etc) have potentially quite different responses to price changes (ie, different price elasticities of demand), as does on-licence and off-licence consumption. Another issue is that only those who buy drinks below the minimum price will be affected.
    3. The University of Sheffield study included separate elasticities for light, moderate and heavy drinkers, and for off- and on-licence consumption. The Sheffield elasticities were combined with the New Zealand consumption data to produce estimates of the reductions in consumer surplus.
  3. Transfer to industry: In the case of a minimum price, an increase in price has two effects on the industry, as illustrated in figure x. There is a deadweight loss as a result of reduced production (accounted for in line 3 of the cost benefit table), but there is a gain as a result of the transfer of consumer surplus from consumers to producers (accounted for in line 2). The latter results in an increase in profit for the industry. It is possible that the increased profit is competed away through non-price competition. That is, suppliers will increase the quality of the drinks until the suppliers no longer make super-normal profits. The transfer to industry is, in effect, returned to consumers in the form of increased quality, which increases their consumer surplus. While this point was acknowledged in the analysis, it was not explicitly modelled. However, who exactly ends up with the consumer surplus shouldn’t make a significant difference to the overall results. Either way, the social cost of an increase in price is not as great as suggested by the measured reduction in consumer surplus in line 1 of the table – it is ultimately just the black deadweight loss triangles.
  4. Industry asset value: Because the quantity demanded and therefore supplied drops, some alcohol industry-specific assets will become idle and will have to be written off. This loss needs to be taken into account in a CBA.

    The study assumed that 90% of the reduced demand would be replaced by exports. The remaining 10% of the reduced demand results in a reduction to the value of the industry's capital assets with a ten year remaining life. The devalued asset was discounted over the ten year period.
  5. Because less alcohol is consumed, excise tax revenue falls.

311.Costs and benefits not counted:

  1. Harms accruing to people other than the drinker should be counted, but have not been due to data limitations.
  2. The impact of alcohol on volunteering has not been counted due to absence of data.

312.A number of other impacts or costs that have not been estimated are outlined in the study.

313.Quality adjusted life years (QALYs), a measure that incorporates both quality of life and life expectancy, were excluded because they are essentially a private cost is assumed to have already been taken account of in the size of the consumer surplus.

Assessment

314.There are a number of problems and limitations in this study, most of which are acknowledged. Data limitations, in particular, are costly to overcome. The main methodological improvement suggested by this guide would be the use of ranges instead of point estimates: ranges would reveal the extent of uncertainty, including the likelihood that the net social benefit of a minimum price is in fact negative; and explicitly testing the end point of ranges would help reveal the likelihood of bias in the central estimates.

Notes

  • [28]This is a version of Table 3 in the study. It differs in that it omits a couple of intermediate options, classifies increased excise tax income to government (a) as a benefit rather than as a negative cost and re-labels some of the costs and benefits to make them more explicit. We have also added a row setting out the benefit cost ratios.
  • [29]A standard drink contains 10g of pure alcohol, and equals approximately 100ml of 12.5% wine or a 330ml can of 4% beer.
  • [30]Principally the study's inability to distinguish between regular and promotional prices, which may have inflated the elasticities.
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